Key Takeaways
- Canada’s annual inflation accelerated to 3.2% in May from 2.8% in April, according to Statistics Canada.
- Inflation was driven mainly by a continued rise in gasoline prices.
- A recent oil pullback signals a longer Bank of Canada interest rate hold, analysts say.
Canada’s May inflation surged to its highest level in over two years, driven by higher gas prices after the Iran war disrupted global oil flows. However, core inflation measures, which exclude the most volatile price categories, remained relatively stable, offsetting broader inflation. The recent retreat in oil prices on hopes of a final Iran peace deal provides further scope for the Bank of Canada to maintain interest rates for the remainder of the year, according to analysts.
Canada’s Consumer Price Index jumped to 3.2% in May after rising to 2.8% in April, according to the latest Statistics Canada report. On a monthly basis, the inflation gauge accelerated to 1.0% from 0.4% in April.
Stubbornly high gasoline prices drove the bulk of this spike. Month over month, gas prices accelerated to 33.2% in May from 28.6% in April, due to the Iran war oil shock. Transportation prices were a significant factor in higher year-over-year inflation, ticking up to 9.0% from 7.6% in April.
The Bank of Canada’s preferred core measures of inflation, which strip out more volatile categories, such as gasoline, groceries, and rent, came in unchanged from the month before. May CPI-trim remained stable at 2.0%, while CPI-median held at 2.1%. Month-over-month core CPI, which only excludes food and energy, rose slightly to 1.6% from 1.5% in April.
The Bank of Canada is due to make its next interest rate announcement on July 15. Economists widely expect the Bank to maintain its current rate amid shifting headlines about the Iran war peace agreement. The Bank has kept the rate at 2.25% since December 2025.
Following the news, the Canadian dollar remained steady at C$1.41, or 0.70 US cents. The S&P/TSX Composite Index ticked 0.40% higher to 34,997.85, while the Morningstar Canada Index rose by 0.38% to 6,233.13. Two-year government bond yields rose 0.02 percentage points to 2.80%.
May CPI Report Key Stats
- Month-over-month CPI was 1.0%, up from 0.4% in April.
- On an annualized basis, CPI was 3.2%, up from 2.8% in the prior month.
- CPI-trim remained flat at 2.0%, while CPI-median held steady at 2.1%.
The following are excerpts from analyst commentaries on the May CPI report.
Softer Core Measures and Oil Retreat to Ease Inflation
“After a string of lower-than-expected core results in previous months, May’s heavy headline reading stings somewhat. However, the reality is that core remains essentially right on target, and the recent big pullback in oil prices—if sustained—will deliver some important relief on headline readings in the coming months. Still, the persistence of food inflation is a significant thorn, and we have to rate this one as a mild disappointment overall—it’s never good news to see the overall inflation rate track above 3.0%, even if it is for one month only.”
—Douglas Porter, chief economist at BMO Economics
Inflation Likely Peaked as Oil Prices Retreat
“Canadian inflation accelerated again in May, but with oil and gasoline prices now well off their earlier highs, today’s figure should mark the peak. Once again, gasoline was the main source of inflationary pressure, and excluding that one area, the year-over-year rate of CPI would have been a much more modest 2.2%.
“Core measures of inflation may accelerate modestly further in the months ahead, as airfares over the peak summer travel months pick up even more of the fuel-driven price increases, and as the FIFA World Cup temporarily boosts prices in areas such as hotels and spectator sports. However, the low starting point for core measures of inflation on a year-over-year basis should enable the Bank of Canada to look through any near-term acceleration, and we continue to see interest rates on hold throughout the remainder of 2026.”
—Andrew Grantham, senior economist at CIBC Economics
Canada Avoided a Wider Pass-Through of Energy Inflation
“The larger-than-expected rise in headline inflation in May was mostly due to higher food and fuel prices, both of which should largely prove temporary. With core price pressures still muted otherwise, the Bank of Canada will be content with the report.
“The good news for the Bank is that these pockets of strength were not reflective of the broader inflationary picture. Shelter prices fell 0.1% on the month, while prices of goods such as clothing were little changed, likely due to lower discretionary spending. With the worst of the oil price surge now seemingly behind us, the Bank will be hoping that sizeable second-round effects have been averted.”
—Bradley Saunders, North America economist at Capital Economics
Inflation Reading Unlikely to Worry the Bank of Canada
“Canadian central bankers shouldn’t get too fussed about the acceleration in total inflation. Measures of underlying inflation remain very stable around the Bank of Canada’s 2.0% target. Moreover, with global oil prices falling in recent weeks, the spike in gasoline and jet fuel prices has begun to reverse. Markets are little changed following the CPI release.”
—Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
Weaker Demand Is Offsetting Higher Inflation
“Oil prices are down significantly since a tentative peace deal between Iran and the US was reached, and gasoline prices have been following suit. We expect May to mark the peak for headline inflation this year. As expected, we are seeing somewhat higher core inflation in recent months, but we don’t expect it to rise to a level that raises alarm bells for the Bank of Canada.
“Apart from energy costs and some emerging tech price pressures, inflation remains very well behaved in Canada, as a relatively soft demand backdrop leans against sellers raising prices. We expect this to keep the Bank of Canada on the sidelines for quite some time. Bond market yields are so far little-moved by today’s numbers.”
—Leslie Preston, managing director and senior economist at TD Bank
